1. Prof. Dr. Mohd. Ma’sum Billah
CONVENTIONAL BANKING CONVERGENCE WITH ISLAMIC BANKING – IMPACT & IMPLICATIONS
Prof. Dr. Mohd. Ma’sum Billah

2. Areas of Convergence Regulatory Authorities Regulatory Bodies
Management
Financial Principles
Instruments
Products
Marketing

3. PRINCIPLE OF MURABAHAH
“Sale contract between the bank and its customer for the sale of goods at a price which includes the bank’s profit margin”
Bank is the seller,
Customer is the buyer.
Murabahah = Cost Plus
Common Mechanism = Deferred Lump Sum Sale

4. PRINCIPLE OF BAI-BITHAMAN AJIL(BBA)
Bai-Bithaman Ajil (BBA) is known as Deferred Instalment Sale.
A contract of “buying and selling” of an asset between a bank and a customer.
BBA = Cost Plus
Common Mechanism = Deferred Instalment Sale

5. PRE-REQUISITE UNDER BBA
i) Buyer
ii) Seller
iii) Merchandise
iv) Price of the merchandise
v) Aqad/Contract (Offer and Acceptance)

6. MODES OF BAI-BITHAMAN AJIL FINANCING OPERATION
Customer identifies the asset to be acquired.
Bank purchases the asset from the vendor
The bank resells the asset to the customer plus bank’s profit margin
Customer repays by installments within agreed period

7. CONSUMER FINANCING PRODUCTS
House Financing
Study Financing
Unit Trust Financing
Other Consumer Financing
e.g Share Financing

8. LETTER OF OFFER Similar to Conventional Letter of Offer.
The difference are:-
Pricing - Bank Purchase Price
- Bank Selling Price
Repayment
Grace Payment Period
Security Documentation
Takaful
Penalty (compensation clause)
Opening of Wadiah Savings Account

9. BBA
DOCUMENTATION

10. PROPERTY WITH TITLE
Property Purchase Agreement
Property Sale Agreement
Charge Document (Form 16A &
Annexure)

11. PROPERTY WITHOUT TITLE
Property Purchase Agreement
Sale Agreement Cum Assignment
Deed Of Assignment

12. COMPARISON BETWEEN CONVENTIONAL LOAN AND BBA FINANCING
PRODUCT CONVENTIONAL BBA
FEATURES LOAN FINANCING
Concept Base on loan principle Base on buy and sale (borrowing and lending) principle
Pricing Pegged against BLR Fixed profit rate applied
Repayment Varies as BLR Repayment is fixed
fluctuates
Total Amount Known only at the end Known upfront
Payable of the period

13. OTHER CONSUMER FINANCING
Example
Share Financing
Apply the principle of BBA, Murabahah

14. PRINCIPLE OF BAI ISTISNA’
Bai Istisna is a contract on acquisition of goods by specification or order by the financier, where the price is paid progressively to the seller in accordance with the progress of a job completion.
It is a buy and sale contract whereby a buyer (financier) purchases a contract or order from a seller (customer) and subsequently appoints the seller as an agent to make an asset or goods that he requested.
Istisna = Cost Plus

15. PRINCIPLE OF BAI ISTISNA’
The seller must complete the asset/good within a period of time. The buyer and seller will fix the price of the asset/goods and method of payment.
When the goods is delivered/completed, the financier will sell the completed goods to the customer.
Applicable to : Bridging Financing
Contract Financing
Project Financing
Made to Order

16. PRINCIPLE OF BAI AL-DAYN
Bai Al-Dayn is a “Debt Trading”
The Bank purchases the customer's rights to the debt at a discounted price (i.e invoice price minus bank's profit margin) which is normally securitised by a Bill of Exchange.
Upon maturity customer purchases back his debt from the Bank at full invoice price.
Bai Al-Dayn = Discounting of Debt

17. IJARAH (LEASING) This is IBD’s new product and still under development
Only one case (pilot case ) so far
Apply the concept of leasing
Type of leasing
Financial lease
Operating lease

18. Financial lease
Maintenance is borne by lessee
Lessee will acquire the asset at the end of the tenor
Lessee will enjoy capital allowance
Lessee will not enjoy tax exemption on rental paid

19. Operating lease
Maintenance is borne by lessor
Lessee has no right to purchase the asset at the end of
the tenor
Lessor will enjoy capital allowance
Lessee will enjoy tax exemption on rental paid

20. Other features
This product is offered on selective basis
This product is offered for new equipment or equipment that enjoy capital allowance in Malaysia.
The bank will ensure the profit rate charge on customer will commensurate with capital allowance enjoyed by the Bank
IBD to assist on computation aspects

21. COMMERCIAL FINANCING PRODUCTS
Asset/Working Capital/Other Financing
Small Entrepreneur Fund (TUK)
Small Medium Industries Financing (TIKS)
Fund For Food (3F)
Rehabilitation Fund For Small Medium Industries

22. ASSET/WORKING CAPITAL/OTHER FINANCING
Concept
This financing can apply the concept of Bai Bithaman Ajil or Murabahah
Issues of collateral
Secured by same property
Different property
Corporate guarantee

23. SPI FUND FOR SMALL ENTREPRENEUR (TUK)
SPI Fund for Small Entrepreneurs or widely known as Tabung Usahawan Kecil (TUK) is aimed at providing an efficient and systematic delivery system to channel financing ranging from RM2,000 to RM50,000 for the benefit of the small entrepreneurs in the country.

24. SMALL MEDIUM INDUSTRIES FINANCING (TIKS)
This financing is similar to Tabung Industri Kecil dan Sederhana (TIKS) in Conventional Banking.
It involves two relationship:-
Bank and customer
Bank and Bank Negara

25. Bank and customer
Bank gives financing to customer by using principle of BBA or Istisna’ or Murabahah. For example Bank gives financing 6.5% to customer.
Bank and Bank Negara
Bank sells the loan to Bank Negara at 4.0% (current BNM funding rate) using the concept of Bai Al-Dayn. Therefore, Bank’s profit margin is 2.5%.

26. Pricing
In Letter of Offer, bank gives financing rate of 10.5% to
customer.
In actual payment, customer makes repayment to the
bank base on financing rate of 6.5%
The difference 4.0% is a rebate to the customer.

27. SPI FINANCING UNDER FUND FOR FOOD (3F)
This financing is similar to Fund For Food in
Conventional Banking.
It involves two relationship:-
Bank and customer
Bank and Bank Negara

28. Bank and customer
Bank gives financing to customer by using principle of BBA or Istisna’ or Murabahah. For example Bank gives financing 4.0% to customer.
Bank and Bank Negara
Bank sells the loan to Bank Negara at 1.0% (current BNM funding rate) using the concept of Bai Al-Dayn. Therefore, Bank’s profit margin is 3.0%.

29. REHABILITATION FUND FOR SMALL AND MEDIUM INDUSTRIES
This financing is similar to Rehabilitation Fund for Small and Medium Industries in Conventional Banking.
It involves two relationship:-
Bank and customer
Bank and Bank Negara .

30. Bank and customer
Bank gives financing to customer by using principle of BBA or Istisna’ or Murabahah. For example Bank gives financing 5.0% to customer.
Bank and Bank Negara
Bank sells the loan to Bank Negara at 1.0% (current BNM funding rate) using the concept of Bai Al-Dayn. Therefore, Bank’s profit margin is 4.0%.

31. CORPORATE FINANCING PRODUCTS
Islamic Securitization
Property Financing
Asset Financing
Equipment Financing

32. ISLAMIC SECURITIZATION
Requirement = Financing must be executed under any underlying financing contracts permitted under Syariah.

33. COMMON FINANCING CONTRACTS FOR ISLAMIC SECURITIZATION
Murabahah = Short-term Working Capital Financing
BBA = Long-term Financing
Ijarah
Common Feature : Element of Profit Margin Built-in
Trading Concept : Bai Al-Dayn (Debt Trading)

34. In Malaysia, the common Islamic Securities is
Debt Based Securitization.
First Example
Year
Company Shell MDS Sdn. Bhd.
Concept Used BBA
Amount RM125 million

35. STATISTICS(30/6/99)
22 issues amounting to RM billion (excluding Malaysian Government/Government Agencies issuance)
15 issues of Islamic Commercial Paper
amount RM billion
7 issues of Islamic Corporate Bonds
amount RM billion

36. RHB GROUP ISLAMIC FINANCE INITIATIVE
Example……
RHB GROUP ISLAMIC FINANCE INITIATIVE
RHB Bank
Facility Gas District Cooling (KLIA) Sdn. Bhd.
Murabahah Notes Issuing Facility
Year
Function Arranger
Amount RM 207 million

37. RHB GROUP ISLAMIC FINANCE INITIATIVE
RHB Sakura
Facility Sarawak Shell Berhad
Musyarakah Bond
Year
Function Lead Arranger
Amount RM 560 million

38. RHB GROUP ISLAMIC FINANCE INITIATIVE
RHB Sakura
Facility Petronas Gas Berhad Islamic Debt Securities
Year
Function Joint Lead Manager
Amount RM 800 million

39. RHB GROUP ISLAMIC FINANCE INITIATIVE
RHB Sakura
Facility KLIA
BBA Bonds
Year
Function Co-Advisor
Amount RM 2.2 billion

40. RHB GROUP ISLAMIC FINANCE INITIATIVE
RHB Sakura
Facility Petronas Gas Berhad Murabahah Notes Issuing Facility
Year
Function Lead Arranger & Agent
Amount RM 900 million

41. RHB GROUP ISLAMIC FINANCE INITIATIVE
RHB Sakura
Facility Petronas Gas Berhad BBA Bonds
Year
Function Lead Arranger
Amount RM 500 million

42. PROPERTY FINANCING BBA based financing and Istisna’ based financing
Common Tenors = 5 years to 7 years
Reasons For BBA/Istisna’ = Lock in Cost

43. ASSET FINANCING Murabahah/BBA based financing
Any form of tangible asset
Receivables as a form of asset (Murabahah financing)

44. EQUIPMENT FINANCING Ijarah based financing
No system support at this point of time
Big ticket items on an ad-hoc basis
Expect to launch in early 2000

45. Shari’ah Compliance Authority Claims & Distributions
Mechanisms For Conventional Convergence in to Islamic Banking
Regulatory Frameworks
Harmonization of Existing Laws
Shari’ah Guidelines
Shari’ah Compliance Authority
Shari’ah Advisor / Consultant
Shari’ah Advisory Body
Shari’ah Compliance is Mandatory
Management
Headed by Muslim
Mixed Staff Allowed
Operations
Adapting Shari’ah Standard
Product Innovations
Screening the Existing
Product with
Shari’ah Standard
Shari’ah Justified Product
Harmonization
Between Conventional & Islamic is Encouraged so long not contrary to Shari’ah
Fund Management
Segregated & Transparence A/C
Marketing
Composite Allowed
Finance Knowledge with Shari’ah Guidelines
Investment
Shari’ah Justified Avenues
Halal Counters
Halal Returns
Benefits
Service Charge
Investment A/C
Ihsan A/C
Claims & Distributions
In Accordance with the Terms & Conditions
Unjustified / Unreasonable Claim & Distributions are not Allowed 20

46. THANK YOU
WASSALAM